More Regulations = More Opportunity?

Shelley Yates, Communications Senior Advisor
March 14, 2018

New regulations can often make the life of a financial advisor cumbersome and overwhelming for clients as they navigate through stacks of new account paperwork and endless paragraphs of disclosure. However, new regulations can also create an opportunity for proactive financial advisors to deepen client relationships and build trust.

In fact, that’s exactly the case for two regulations going into effect in 2018 ―Trusted Contact and Beneficial Owner ― which increase protections for investors.

Trusted Contact

The new Trusted Contact rules concern the collection of trusted contact information for each new client. As of Feb. 5, 2018, amendments to FINRA Rule 4512 (Customer Account Information) require financial advisors to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account. By establishing trusted contacts for customer accounts, this allows advisors to better protect customers from financial exploitation by granting the financial advisor the ability to contact a customer’s designated trusted contact person should suspicious or questionable events occur.

New FINRA Rule 2165 (Financial Exploitation of Specified Adults) takes this one step further by allowing advisors to place temporary holds on disbursements of funds or securities from the accounts of “specified adults” where there is a reasonable belief financial exploitation has occurred or will occur. A “specified adult” is defined in the regulation as a natural person age 65 and older, or a natural person, age 18 and older, who is reasonably believed to have a mental or physical impairment that renders the individual unable to protect his or her own interests.

It sounds like a simple question — “who do you trust?” — but it can unlock a wealth of information about the client. More often than not, the client’s trusted contact is also likely their heir. While we strongly encourage against using a suspicious incident as a sales opportunity, taking the time to build a trusted relationship with a client’s trusted contact can set the stage for future opportunities.

Consider the subject of legacy planning.

Has the client thought about who to bequeath their assets to? Have they set up their accounts and paperwork to reflect their wishes? It’s never too early or too late to get started on estate planning – a new parent and a senior living in an assisted-living facility can both benefit from an updated, clearly-defined will. 

Too often, an heir has no contact with their parents’ advisor until they’ve already inherited the estate. Perhaps that’s why 95 percent of inheritors leave their parents’ advisor after the loss of both parents. Why not use the trusted contact conversation as an introduction to the clients’ heirs?

Encourage clients to include their heirs as part of ongoing wealth management conversations. Over time, this may encourage the heir to seek out the advisor’s assistance with their own assets. Remember, it’s not just about generational wealth transfer – it’s about generational wealth planning.

Beneficial Owner

The second opportunity presented by new regulations surrounds FinCEN’s Customer Due Diligence Rule. Beginning May 11, 2018, financial institutions will be required to identify and verify the identity of beneficial owners of legal entity customers, including corporations, LLCs, limited partnerships, business trusts, etc. The rule defines a beneficial owner as someone who owns 25 percent or more of the equity interests of a legal entity customer; a single individual with significant responsibility to control, manage or direct a legal entity customer; or any other individual who regularly performs similar functions.

Similar to the trusted contact rules, this presents several opportunities.

  • First, the person opening the account may not be the actual beneficial owner, which could lead to a referral.
  • Second, just as individuals have a variety of wealth management needs, so too do businesses. Beneficial owner conversations could easily lead to discussions about qualified retirement plans, key man life and disability insurance and more about the business in question.
  • Lastly, building a relationship with a business/beneficial owner can eventually be leveraged as a prospecting opportunity. For example, if an advisor has built a successful relationship with a beneficial owner, the advisor may be able to host a lunch-and-learn at the company to reach potential new clients.

Bottom Line

Although the trusted contact and beneficial owner regulations were created for the protection of investors, their benefits far exceed asset protection. They offer business-building growth potential for those financial advisors who have built their firms to the highest standards of ethics and client service. Don’t miss this opportunity to open the conversation on estate planning or business protection, to generate referral opportunities and to protect your financial services business from asset loss via inheritance.

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